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Panel on Audit Research and Regulation PowerPoint PPT Presentation

Panel on Audit Research and Regulation. Empirical/Archival Research and How Such Research Can Inform Regulation. Professor Karla Johnstone, University of Wisconsin School of Business. My plan: Discuss the relationship between auditing practice/regulation and research

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Panel on Audit Research and Regulation

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Empirical/Archival Research about Materiality and Detected Misstatements

Articulates a model and provides empirical evidence on how manager and auditor incentives are associated with materiality judgments about detected misstatements.

Uses SAB 108 disclosure data.

Results show that managers are more likely to waive misstatements when analyst following is more intensive.

But, auditors respond to their reputational incentives, and for larger, more high profile clients (those with relatively high audit fees) they resist management’s preference for waiving material misstatements.

Empirical/Archival Research andAuditing Practice/Regulation

Motivation/Data Source: Existence of audit firm rotation in non-public entities in U.S. (e.g., some governmental entities) and internationally.

Empirical/Archival Research about Audit Firm Rotation

Research Relating to this Topic

Jackson et al. (2008, MAJ)

Reports that audit quality (propensity to issue a going concern opinion) increases with audit firm tenure; no effect when using discretionary accruals as audit quality proxy. These results are counter to calls for mandatory audit firm rotation.

Ruiz-Barbadill et al. (2009, AJPT)

Mandatory audit firm rotation had been in effect in Spain from 1988-1995, but that requirement was abandoned in the post 1995 period.

Results reveal that auditors are no more likely to issue a going concern report (audit quality proxy) in the mandatory audit firm rotation period. These results are counter to calls for mandatory audit firm rotation.

Empirical/Archival Research andAuditing Practice/Regulation

Let’s talk about briefly about other examples:

General Topic: Audit Partner Signature and Audit Partner Rotation

Motivation: PCAOB’s Concept Release on the Transparency of Audits proposes such disclosure in the U.S.

Look to ground your research in theory, but consciously consider practical insights and implications, along with data availability.

What are the downsides/challenges to research in this area?

Publicly available data in research databases is over-used. Implication: don’t be lazy…hand data collection is often necessary.

Available data is often a messy proxy for theoretical constructs, e.g., how to proxy accurately for audit quality?

Auditing firms are very hesitant to provide data because of confidentiality rules. You’ll need to foster relationships with powerful partners within the firms in order to gain access; and you’ll need to provide a practical reason for the firms to say “yes” to your requests.

There are continual econometric/statistical developments on which to keep current (e.g., Keune and Johnstone 2012, TAR for interactions in logistic regression).

How do empirical/archival and experimental research methods complement one another?

They generally share the same motivation, e.g., studying audit quality is conceptually the same whether an empirical or experimental method is used.

You can use results from an experimental setting to motivate an investigation using empirical data; and vice versa.

Experimental methods provide control and tend to be high on internal validity; empirical methods tend to be high on external validity.